The upsides and downfalls of patent cease and desist letters

Once an applicant has obtained a patent and has identified possible infringers in the marketplace, the question becomes what to do next. One of the most obvious steps is to contact the infringer by letter.

Such a letter can have a number of positive effects for the patent owner. The letter can put the infringer on notice of the infringement. This can be of benefit in proving willful infringement and associated damages at trial. Such a letter may encourage the infringer to simply cease the infringing activity and eliminate the improper competition in the marketplace. A letter may also initiate licensing negotiations. If a license is negotiated, the patent owner can benefit from a royalty stream from the infringer.

One benefit of being the patent owner is the flexibility to decide whether to file a patent infringement suit, and the ability to determine where the litigation will take place. One of the risks of sending a patent cease and desist letter, however, is that, unless the letter is carefully drafted, the infringer may file its own action for a declaratory judgment (DJ) of non-infringement. Such a DJ action will obviously be filed in a jurisdiction chosen by the infringer and not by the patent owner. Furthermore, even if the patent owner later files an infringement action in a jurisdiction of its choice, the general rule in the federal courts is that the first-filed action will proceed and control the litigation between the parties. Thus, the patent owner may end up litigating as a defendant in an unfriendly jurisdiction.

In order to file a DJ action, there must exist a definite and concrete dispute between the parties. The courts analyze the acts of the patent owner to determine whether they indicate such a dispute exists. Thus, the patent owner may opt to send a very non-threatening letter to the infringer in an attempt to avoid a DJ action in response. For example, such a letter may be in the nature of an invitation to collaborate, while still giving the infringer notice of the existence of the patent. While certainly not an insurance policy against a DJ action, a low-key letter will at least help a patent holder argue that there was no threat of litigation, no concrete dispute and, therefore, the infringer lacked the basis to file a DJ action.

Another way to avoid the DJ action problem is for the patent owner to prepare and file a patent infringement complaint in a federal court of its choosing prior to sending the patent cease and desist letter. Such an action does not need to be served on the infringer until 120 days after filing. This gives the patent owner the ability to engage the infringer and attempt to reach a resolution without the risk of facing a DJ action in an unfriendly jurisdiction since the patent owners action will be the first filed.

Another issue that has only recently become important is federal and state legislation in the area of patent cease and desist letters. Federal legislation is pending to curb perceived abuses by “non-practicing entities” (NPEs), aka “patent trolls.” NPEs are parties that have acquired patent rights but generally do not practice the patented technology. Rather, they seek royalties from infringers and often do so by sending cease and desist letters.

Legislation recently enacted in Utah, for example, prohibits the sending of a demand letter that contains a “bad faith” assertion of patent infringement. Indicators of bad faith are listed in the statute and include failure to include adequate identifying information regarding the patent and patent owner, failure to identify claims infringed, and failure to identify infringing products or activities. Indications that a demand letter is not in bad faith include factors such as the sender of the demand letter is the inventor or original assignee of the patent, or that the sender actually practices the technology covered in the patent. The Utah statute provides for an action in state district court. The statute also authorizes the state attorney general to conduct civil investigations and bring actions. Several other states have passed or are considering legislation in the area, including Vermont, Virginia, Kentucky, Oregon and Maine. Any possible cease and desist letter should certainly be structured to avoid exposing the sending to liability under such state statues.

Cease and desist letters can be an important tool for a patent owner. At the same time, patent owners should act strategically to avoid a DJ action by the recipient of the letter. The patent owner should also be aware of recent federal and state law developments related to patent cease and desist letters.